No Longer King Of The North, Pfizer Looks To Recapture Crown

Business is war and nothing is more illustrative of that point than a healthy cycle of M&A activity. Amid a wave of healthcare transactions, Pfizer, one of the world’s largest pharmaceutical companies, announced a $100 billion bid for the British pharmaceutical company AstraZeneca.

What if this were the least bad choice for Pfizer in an increasingly challenging business environment? Pfizer, like other large pharmaceutical companies, is struggling. The blockbuster patent cliff has left the company with greatly diminished revenue and has endangered earnings per share. In 2010, Pfizer revenue was more than $65 billion while in 2013 revenue declined to $51.6 billion, a decrease of more than 20% in three years.

Instead of tactically acquiring vibrant biotech companies with truly mission-oriented cultures or even innovating through good old-fashioned lab work, Pfizer is attempting to become the world’s largest pharmaceutical enterprise through a complex financial initiative.

So why is Pfizer doing this? As a $200 billion healthcare company, Pfizer can demonstrate its relevance in a way that only a major deal can command. This deal also allows Pfizer to compensate for lost revenue and product exclusivity by acquiring AstraZeneca’s product lines and research capabilities. Lastly, as most good CPAs will tell you, avoiding taxes is the next best thing to increasing revenue and this acquisition could significantly reduce the company’s tax liability.

But this wouldn’t be the first time Pfizer has executed this sort of financial maneuvering. If history repeats itself, the following precedents should be noted. On January 1, 2010, after acquiring Wyeth for $68 billion, Pfizer had 116,500 employees. By the end of 2013, the company had 77,700 employees, a reduction of more than 38,000 people. Also, in 2013 the company initiated a $10 billion stock repurchase plan. During the same period Pfizer increased its earnings per share from $1.94 to $3.19. The effect of such tactics were short lived, however, as Pfizer was weakened by a violent downturn in the economy and the realities of the great patent cliff.

By acquiring AstraZeneca, Pfizer could increase its earnings by becoming a British-based corporation with a significantly lower tax burden than a U.S. company. Furthermore, for the cash portion of any deal, much of the money Pfizer would use to acquire AstraZeneca would come from Pfizer’s massive offshore accounts. So Pfizer could acquire a significant asset by using funds that would have been taxed at a higher rate if they were ever brought back to the U.S., and Pfizer would save significant taxes on product sales going forward by becoming a British-based company and enjoying a much lower tax rate.

All this makes ample financial sense for Pfizer, a company that has lost large amounts of revenue on its most profitable products – drugs like Lipitor, Norvasc, Celebrex and Lyrica that now face competition from low-price generic brands. But the proposed acquisition of AstraZeneca would not bolster the combined company’s blockbuster holdings for long. AstraZeneca has and will continue to lose exclusivity of several of its own blockbusters. In 2013, AstraZeneca lost exclusivity of Seroquel IR. It will lose exclusivity of Nexium in 2014 and Crestor in 2016. At the same time, sales of Brilinta/Brilique, which were expected to compensate for losses from other drugs have been disappointing.

As the old blockbuster cohort declines, there is a new generation of blockbuster drugs, but many have not come from traditional large pharmaceutical companies. They are now the legacy of the big players in biotechnology like Amgen, Celgene and Gilead Sciences. The irony is that these were all small biotechnology companies not too long ago. That they are industry standard-bearers today demonstrates that mission-oriented R&D organizations driven by dynamic cultures can make scientific breakthroughs and achieve growth.

For now the stakes are high for all the players in the healthcare kingdom as an “acquire or be acquired” frenzy reigns. Once this round of mergers and acquisitions comes to an end, which invariably it must, it’s likely big pharma will return to business as usual, even though the next logical move should be to acquire larger biotechnology companies before the biotechs become the rulers of the land.